Technical Analysis 101 : Session 6

Stanley YabroffVal Alekseyev

Rules for trading Discipline the key to trading Open discussion on trading

Session 6

1. Use Money you can afford to

loose

2. Know yourself

3. Start small

4. Don’t over commit

5. Isolate from your desire for

profit

Thoughts on Trading

6. Don’t form new opinions during

trading hours.

7. Take a trading break.

8. Don’t follow the crowd.

9. Block out other opinions.

10. When you’re not sure, stand

aside.

Thoughts on Trading

11. Try to avoid market orders.

12. Trade the most active option month.

13. Trade divergence between related

commodities.

14. Don’t trade too many commodities at

once.

15. Trade the opening range break out.

Thoughts on Trading

16. Trade the breakout of the previous day’s

range.

17. Trade the breakout of the weekly range.

18. Trade the breakout of the monthly range.

19. Build a trading “pyramid.”

20. Never put your entire position on at once.

Thoughts on Trading

21. Never add a losing position.

22. Cut your losses short.

23. Let profits run.

24. Be impatient with losing positions.

25. Learn to like losses.

Thoughts on Trading

26. Use stop orders cautiously.

27. Get out before contract maturity.

28. Ignore normal seasonal trends.

29. Trade the divergence from normal.

30. Avoid picking tops and bottoms.

Thoughts on Trading

31. Buy bullish news, sell the fact.

32. Bull markets die of overweight.

33. Look for good odds.

34. Always take windfall profits.

35. Learn to sell short.

Thoughts on Trading

36. Act promptly.

37. Don’t reverse your position.

38. Don’t be a nickel and dimer.

39. Know the price trend.

40. Watch for the key breakouts through trend

lines.

41. Look at one timeframe above and below

the one you are using.

Thoughts on Trading

41. Watch for 50% retracements of a major move

42. Use the half way rule when picking buy-sell

spots.

43. Watch the magnitude of market change.

44. Congestion areas can mean support or

resistance.

45. Major moves frequently climax with a key

reversal.

Thoughts on Trading

46. Watch for head and shoulder formations.

47. Watch for “M” tops and “W” bottoms.

48. Trade triple tops and bottoms.

49. Watch Volume for price clues.

50. Open interest may be a tip off.

Thoughts on Trading

Jack Schwager’s Planned Trading Approach

• 1.Define your trading philosophy or system• 2. Choose your markets to be traded• 3. Specify your risk parameters

– A. Minimum risk per trade– B. Stop loss strategy– C. Diversification– D. Reduce leverage for correlated markets– E. Losing period adjustment

• 4. Establish a planning time routine– A. Upgrade system and charts– B. Plan new trades– C. Update exit points for existing positions

• 5. Maintain a trader’s notebook• 6. Maintain a trader’s diary

– 1. Reason for trades– 2. How the trades turn out– 3. What lessons are learned

• 7. Analyze your personal trading

Jack Schwager’s Trading Rules and Observations

• Differentiate between major position trades and short term trades• Don’t be greedy trying to get a better entry price for major trend trades• Entry into major trend trades should planned not intraday impulses• Find a chart pattern that says the timing is correct• Place order on a daily analysis, wait for desired entry points• When looking for a major reversal in the trend. It is usually wiser to wait

for some pattern that suggest that the timing is right.• Don’t let the fact you missed the beginning portion of a trend keep you

from trading with that trend

Trading Rules 2• Never fade the first gap of a price move• Use market orders not limit orders to enter trades• Never double up near the original trade entry point after having been ahead• Determine a specific protective stop point at the time of trade entry• Exit any trade as newly developing patterns or market action are contrary to

your trade• Always get out immediately once the original premise for the trade is violated• If the market goes dramatically against your trade in the first day, especially a

gap, exit the trade immediately • If there is a major breakout counter to your position either exit immediately or

use a very short stop order• If a given market suddenly trades far in excess of its recent volatility in the

opposite direction of your position, exit immediately• If selling (buying) into resistance (support) and the market consolidates instead

of reversing, get out.

Trading Rules 3• If you are able to follow the market for a period of time, exit

your position or place and GTC order• Fight the desire to immediately get back into the market

following a stopped out system• When trading goes badly

– Reduce position size ( strongly correlated positions are similar to a large position)

– Use tight stop loss points– Slow up in taking new trades– Reduce risk exposure by liquidating losing trades, not winning trades

• Be extremely careful not to change trading patterns after making a profit– Don’t initiate risky trades– Do not suddenly increase the number of contracts you typically trade

• Trade small positions with the same common sense as large positions– Never say It’s only one or two contracts.

Trading Rules 4

• Avoid holding large positions into major reports or the release of government reports

• Apply the same money management principles to spreads as to outright positions

• Don’t buy options without planning at what outright price trade is to be liquidated

• Do not take small, quick profits in major positions trades– In a large move in your favor, never take profits on the first day

• Don’t be too hasty to get out of trade with a gap in your direction• Use trailing stops instead of profit objectives as a means of getting out

of profitable trades• It is useful to set profit objectives at the time of initiating trades

– With larger positions take partial profit– Reinstate position on correction

Trading Rules 5

• If your objective is met and the trade remains good, use trailing stops and remain in the trade

• In a very strong move, too good to be true, take partial profit• Pay more attention to market action and evolving pattern than to

objectives and support/resistance areas• When you think you need to enter or exit a trade, do it, don’t

procrastinate• Don’t trade counter to your view of long term trend• Winning trades tend to be ahead right from the start• Correct timing entry and exit can often keep a loss small• Intraday decisions are almost always wrong

Trading Rules 6

• Be sure to check your positions before the close on Friday• If a market sets new historical highs and holds, the odds strongly favor

a move higher. Selling new highs is an amateur trader’s worst mistake• Narrow market consolidation near upper end of broad trading ranges

are bullish patterns.• Narrow consolidations near the low end of trading are bearish patterns• Play the breakout from an extended, narrow range with a stop against

the other side of the range• Breakouts from trading ranges that hold 1-2 weeks or longer, are

among the most reliable technical indicators of impending trends• A common useful form of the above rule is flags and pennants forming

right above or below prior extended and broad trading ranges tend to be fairly reliable continuation patterns

Trading Rules 7• A breakout to new highs or lows followed within the next week or two by a gap

back into the range is a particularly reliable form of bull or bear trap• If the market breaks out to a new high or low and then pulls back to for a flag or

pennant in the pre-breakout trading range assume the top or bottom is in place. Take a position using the other side of the consolidation for your stop

• A breakout from a trading range followed by a pullback deep into the range ( ¾ or the range or more) is another bull or bear trap formation

• If an apparent V bottom is followed by a near by congestion pattern it may represent a bottom. However if the is consolidation is then broken on the downside and the V bottom is approached this may point to a new lower low. The opposite is true for tops. You can play the breakout using the congestion level as your protective stop.

• V tops and V bottoms followed by multi month consolidations that form in close proximity to the reversal point tend to major tops and bottoms.

• Tight flag and pennant consolidations tend to be reliable continuation patterns and allow entry into an existing trend with a close stop point.

Trading Rules 8• If a tight flag or pennant consolidations breakout in the wrong direction expect

the move to continue in the direction of the breakout• Curve consolidations tend to suggest an accelerated move in the direction of

the curve• A breakout of a short term curved consolidation is the opposite direction tends

to be a trend reversal• Wide ranging days compared to recent trading days with close counter to the

main trade is a signal of a trend change (key reversal)• Near vertical, large price move over a 2-4 days, coming off a recent high or low,

tend to extend in the following weeks• Spikes are good short term reversal signals. The extreme of the spike is a good

stop point.• The ability of a market to hold relatively firm when other related markets are

under significant pressure can be view as intrinsic strength. A market acting weak when related markets strong show intrinsic weakness

• If a market trades consistently higher for most of the trading session, expect the close to be higher

Trading Rules 9• Two successive flags with little separation can be view as a

continuation plan• View a curved bottom followed by a shallower same direction curved

consolidation near the top of the pattern, as a bullish formation (cup and handle). Major bottom for stocks. Similar pattern would apply to market tops.

• Major tops and bottom rarely occur in the absence of extreme sentiment readings (current or recent)

• A failed signal is more reliable than the original signal. Go the other way using the high (low) before the failure signal as a stop

• The failure of a market to follow through on significant bullish or bearish news is often an indication of an imminent trend reversal. Pay particular attention is you have an existing position

Val Alekseyevvalekseyev@cqg.com

Stan Yabroffstan@cqg.com

1 800-525-7082 www.cqg.com